Storm clouds are starting to lift as the industry comes to grips with the challenges of renewable energy
By Claire Heaney
The race for renewable energy is on, and the insurance industry is grappling with how to snare a slice of the action, help save the planet and minimise its exposure in a market which continues to throw up curveballs.
Renewable energy has been a loss-making book for many, but investing in technical expertise, more rigorous vetting and growing maturity has seen some green shoots emerge.
Marsh Head of renewable energy, Pacific, Gemma Claase says the industry is navigating the move to greener energy, corporate responsibility, and the practicalities of covering projects.
“Marsh McLennan co-publishes the Global Risks Report every year with the World Economic Forum,” she tells Insurance News. “From this we see that one of the most perceived long-term threats to society is climate inaction so climate change is going on and it’s our inability to act on that.
“What has been very interesting in the insurance industry is that over multiple years you have had insurers commit to net zero targets. They’re revisiting their underwriting portfolios on energy and power, but wider as well, and really trying to understand what we are underwriting, which types of projects we support.”
Ms Claase says some insurers have pulled out of new coal-fired power stations and are working with clients on how they are going to transition into clean energy. But nevertheless there have been pressures on the industry.
“On the one side there is pressure from shareholders, but on the other the renewable energy portfolios for most insurance companies have been loss-makers.”
BMS Risk Solutions’ Head of Power and Energy Australia Ben Humphries says the industry continues to learn more from every renewable energy project delivered.
“The first real boom in Australian renewable energy projects was around 2016,” he says. “We are still in its first decade, and as a proportion of energy generated it is emerging. In many cases, renewable energy is an extremely attractive investment class in Australia.”
The industry learned some lessons from events such as the Texan hailstorms in 2018, which occurred across the US state over three days and caused massive damage to solar farms.
However, it did not immediately drive insurance underwriting decisions in the Australian market until a December 2022 hailstorm affecting a solar farm in Queensland became a game-changer.
“It completely changed the landscape, and it is one of the events we see as substantially affecting insurance terms and conditions for solar photovoltaic risks,” Mr Humphries says.
Recruiting talent has been a priority as the industry confronts the evolving renewable industry and natural catastrophes.
“We have engineers within our broking team,” Ms Claase says. “We have invested very heavily in getting the right people in their teams, often with a lot of engineering backgrounds, making sure they have very deep technical understanding of the likelihoods of these events.”
Marsh has also developed its own hail model to help with modelling for solar panels. “What we found was the models that are usually used by the industry are not granular enough,” she says.
“Hail is so site-specific. In Brisbane we have hail exposure. What happens on one side of the street can be completely different to what happens on the other side of the street.”
The Marsh model draws on industry data including research into the velocity of different-sized hailstones on a particular panel type.
WTW Insurance Australasian Renewable Energy Practice Leader John Rae says he draws on a global team that analyses risk to a high degree, especially when it comes to exposed projects in high natural catastrophe areas.
Ms Claase says the need for deeper data means that securing insurance for renewable power projects can take a bit longer. Developers of standard solar or wind projects would look to engage the insurance market three or four months out from needing insurance in place.
If it is a battery project that goes out to six months, and if it is offshore wind, it’s 12 to 18 months.
“This would be a generic renewable project,” Ms Claase says. “But if you add any kind of complexity to that such as new technology, unproven technology or building it in an area which is much more prone to natural catastrophe events, you will have to elongate that time period.”
Mr Humphries says brokers at BMS collate and synthesise information needed for insurers to make underwriting decisions.
While the Australian renewables industry is centred on solar and wind, battery developments are increasing in importance.
Mr Humphries says the Waratah Super Battery near Newcastle NSW is currently regarded as the biggest battery in the Southern Hemisphere, but more and bigger batteries are already in the pipeline.
“We’re supporting clients in the early stages of project developments which will ultimately be bigger than that,” he says. “Everyone you speak to is increasingly short on time, with limited resources. We must make their jobs as easy as humanly possible to get the very best outcomes for our clients.”
As brokers, he and his specialists must be across everything from geography to revenue models and external risks, including the rising NIMBY movement.
He says some projects might start with a few people in a rented office who end up with an asset worth hundreds of millions – or billions – of dollars.
“The insurance market for renewables risks is still developing. Ultimately, we must think about the impact of climate events and how these will shape future outcomes.”
He says it is valuable for all parties to be involved from day one, with early engagement with insurers.
“Every project – and this goes for brokers like me as well as underwriters – you will learn more that can be applied to the next project. The most important thing is that our clients are willing to learn – to take on lessons learned. This gives insurers a higher degree of confidence in supporting a project.”
WTW’s Mr Rae agrees the key to a successful project is being involved in the early stages. “Because renewable energy is a very particular risk and needs a specialist who can truly understand the life cycle of the project, we work across the entire life cycle of the project – what we call cradle-to-grave solution.
“We work on preconstruction, construction, operations and all the way to the eventual decommissioning. We are the specialists at all of this. It shows a really multi-faceted skillset that a lot of our competition does not have.
“It is not like other industries which stay the same year on year on year. We have to adapt and move with the times, and we have to move with the transition. The transition is moving so fast we need to move with it.”
Mr Rae says clients with the strongest risk management and strong insurer relationships are likely to receive flat premiums, while those with poor claims history face rises.
“Solar rates are going up because of recent global nat cat events – weather, flood and wind. Globally it is performing pretty badly.”
He says premiums for batteries and wind remain consistent. “The premium you can achieve depends on your reputation in the market and your previous claims and risk management.”
Project owners that understand risk management and mitigation are valued, and that is reflected in premiums.
“In the beginning there was intense competition for renewable energy projects by insurers wanting to gain first-mover advantages and pricing too low to be sustainable. There has been a levelling-up of premium rates to a more reasonable level, and increases for good risks are starting to flatten out a bit now.”
Mr Humphries says anecdotally there been losses in the Australian market, which have created pressure on insurers.
“It is an emerging asset, and there are not yet hundreds of millions of dollars in insurance premium being paid, as such major losses will inevitably have a flow-on impact on terms and conditions offered by insurers.”
He agrees solar cover is trending up due to exposures to hail, wind and fire – both bushfires and fire originating from the site.
Ms Claase says in the world of insurance, renewable energy insurance has been a fast-growing infant. “It has had to grow very quickly. Over the years terms and conditions were soft with lots of capacity flowing into the market without really understanding what we are underwriting technically.
“It is an ethical dilemma. We have to support these projects, and we also need to play a part in the net zero transition, but it has been a loss-making portfolio.”
She says clients with clean books are seeing premium increases of 10 to 20 per cent. “If we look overall where the market needed to be, we needed that deeper level of underwriting. The last thing we need is underwriters making so many losses that they draw out completely.”
Mr Humphries says while parametric insurance might have advantages, he isn’t sure there will be big uptake.
“I’ve had a number of conversations with clients and parametric markets but never taken it so far as to formalise a proposition,” he says. “There are some very significant differences with traditional insurance coverage that make them harder for project owners (and their financiers / equity investors) to understand and accept.
“I’m also anecdotally aware that a number of parametric markets are scaling back on hail, noting the relatively poor quality of data available to assist them in modelling the exposure. “
Mr Rae says in addition to natural catastrophe events, many of the projects are concentrated in certain areas, which could lead to sub-limiting of coverage due to accumulation issues.
“The biggest risk is uninsurability. The industry has performed quite poorly with a negative claims ratio. Money going into insurers versus money going out is distorted.”
He says this has led to higher premiums and lower coverage “and higher deductables to rectify their books”. 0
How a battery fire gave insurers confidence
Burning issue: fire broke out at the Victorian Big Battery site in 2021. Credit: Fire Rescue Victoria
The containment of damage and disruption when fire broke out at a battery energy storage site in Queensland has given the insurance industry greater confidence.
While solar and wind are the “bread and butter” of the renewable energy industry in Australia, many projects are adding batteries.
BMS’s Ben Humphries points to the Victoria Big Battery fire in Geelong in July 2021 and the subsequent September 2023 fire at the Bouldercombe Big Battery, near Rockhampton, as adding to the insurance market’s knowledge around the performance of battery storage systems in the event of a loss.
The Bouldercombe battery fire was contained to a single unit, and it was back in operation within days.
“In respect of battery energy storage system pricing in particular, I would say that each battery project we take to market is more competitive than the one behind. Trending down from a higher base though than Solar PV or wind,” he says.
As people become aware and more comfortable with the technology the premiums will reflect that.
WTW’s John Rae agrees there have been lessons from recent battery energy storage projects, but spacing continues to be a concern, and recent incidents such as Bouldercombe are being closely watched by insurers.
“Noting that the Bouldercombe fire did not propagate from one unit to another is a positive for insurers, as their biggest concern is fire destroying an entire project,” he says.